If you find yourself with a bigger tax bill than anticipated, don’t panic. With a little bit of planning, you can avoid this common issue for sole traders. All you need are a few software tools and a basic understanding of your tax schedule. Use our practical tips to better manage your income and taxes, and you’ll be on your way to avoiding a massive tax bill down the road.
Essential Tips to Avoid a Huge Tax Bill as a Sole Trader
1 – Be Knowledgeable About Your Tax Bracket and Tax Rates
Your effective tax rate is the tax rate you pay on your taxable income. The more you earn, the higher your tax rate will be. Your tax bracket is determined by your filing status and taxable income.
Certain expenses are deductible, meaning they will lower your taxable income and lower your tax liability. However, they’re only deductible if they’re business expenses. You’ll need to keep track of all your expenses, including mileage and travel, to ensure that you’re getting the most tax savings possible.
2 – Separate Business and Personal Accounts
A large tax bill usually occurs when your business and personal accounts are mixed together. Your business accounts and credit cards should not be used for personal items. Try to keep as much of your money in business accounts as possible.
Keep your business and personal finances separate and organized. Use separate checking accounts and business credit cards. If you’re self-employed, open your own business bank account. Then, once a week, transfer any money you earned that week into that account. This will help you keep track of your income, and it will also help you identify where you’re spending your money so you can keep a better eye on it.
3 – Anticipate Your Tax Bill
The easiest way to avoid a huge tax bill is to plan for it. Keep track of your income for the year. Try to anticipate what your final tax bill might be before it’s time to pay it.
If you have a home office, keep good records of your home office expenses. If you have a second car, keep a good track of how many miles you’re driving and what you’re driving it for. If you’re planning a big purchase, like a car or a home, consider how it will affect your taxes. Planning ahead will help you avoid a big tax bill.
4 – Hire a Tax Professional
The best way to avoid a huge tax bill is to hire a tax professional. A good accountant will make sure you’re doing everything properly and taking advantage of everything the government allows to lower your tax bill.
Good accounting firms will offer pre-filing tax services, year-end tax planning and tax preparation services. Those services can help you keep an eye on your business income and expenses as they happen throughout the year, which will ultimately help you minimize your tax bill.
A big tax bill can be stressful and overwhelming. A big bill could be in the thousands, and that money could have been used to pay bills, pay down debt or save for retirement. Fortunately, if you’re prepared, you can minimize your tax bill and avoid an unexpected tax bill.
If you need an accounting firms on the Sunshine Coast to help with your taxes, contact SMB Accounting. Our business does Individual tax returns, small business accounting with various small business accounting packages available, SMSF audits (self-managed super funds), as well as a Xero accounting software-based accounting business. We also offer the following audits: trust account audits, audits of non-profit organizations, audits of special purposes financial statements, special needs audits, and more.